Geographic Diversity – for VCs, not so much

From Austin, Texas to Bozeman, Montana a myriad of communities are claiming to provide fertile ground for technology startups. A young, skilled workforce, strong academic institutions and an ability to collaborate remotely over the Internet give credence to the idea that many of these places can be viable locations to incubate successful new tech businesses. While the theory is sound, the reality is somewhat different when it comes to funding these startups. A recent article in Wired Magazine identifies numerous challenges faced by small tech companies attempting to get started outside of Silicon Valley, not the least of which is access to funding sources. Although it may not be hard to find the talent needed to turn a great idea into the next big thing, finding investors willing to fund the process may be a whole different story and, contrary to reports, it’s getting more difficult not less. If you don’t believe this just look at this data from the PWC/MoneyTree Venture Capital report for the past eighteen years:

The percentage of VC funds invested in California has risen steadily from 37% in 1995 to just under 50% last year. The statistics are surprising given the publicity around various hotbeds of startup activity across the country. So why does the data seemingly contradict the common perception that geographic diversity is increasing with regard to the location of startup technology companies. The answer may lie in the growing conservatism among VC investors. In addition to the much publicized abandonment of Series A round funding, VCs are also tending to keep their money closer to home. To keep their limited partners confident that they can keep a watchful eye on their investments many will now only invest in companies that are within driving distance of their office. With the vast majority of VCs located in California it’s no surprise that most of their portfolio companies will be found in the same general area. The bottom line for technology startups… if you believe you can make it without outside funding you can probably start your business anywhere in the country but if you’re planning on getting VC funding at some point along the way you may want to consider your proximity to Sand Hill Road.